U.S. consumers closed their wallets last month as retail sales unexpectedly declined for the first time since October, according to new government data.
July’s retail sales, which are not adjusted for inflation, fell 0.6 percent from a 0.2 percent gain in June, according to the Census Bureau.
Economists had forecast a tepid increase of 0.1 percent.
The broad-based deceleration was largely driven by falling demand at gasoline stations (negative 0.9 percent), motor vehicle and parts dealers (negative 1.8 percent), and digital retailers (negative 0.9 percent).
Conversely, general merchandise stores (0.3 percent) and apparel (1.9 percent) registered gains.
Falling fuel prices early last month weighed on gas station receipts. But they could pick back up in August, as pump prices have reaccelerated, hovering above $4 per gallon, according to the American Automobile Association.
Excluding gasoline and automotive services, retail sales slipped just 0.2 percent.
Bank of America economists say the slowdown in transactions likely reflects the waning impact of earlier, temporary boosts.
The bank’s Consumer Checkpoint data show that total card spending growth eased to 5 percent year-over-year, from 6.3 percent in June.
“But much of the moderation appears tied to the fading of temporary boosts (the timing of major online promotions and World Cup-related spending) rather than a broad deterioration in underlying demand,” they said.
Amazon and other retailers had moved major sales events, such as Prime Day, to June rather than July.
Meanwhile, a key metric used in GDP calculations also surprisingly fell in July.
The retail sales control group—a narrower subset that reflects core consumer demand and excludes automobiles, building materials, food services, and gasoline—decreased by 0.4 percent.
The previous month’s reading was revised slightly downward to 0.4 percent.
The consensus estimate suggested a 0.3 percent uptick.
Consumer spending accounts for two-thirds of the economy. It surged at an annualized pace of more than 3 percent in the second quarter, while the broader economy expanded at a rate of 1.5 percent in the second quarter.
Before the July retail sales report, the Atlanta Federal Reserve had forecast third-quarter GDP coming in at close to 6 percent.
Because of a worse-than-expected reading, the regional central bank’s widely watched model could be revised downward.
Consumers’ Financial Health ‘Solid’
A drop in spending comes as consumers’ economic outlook has brightened this summer.
Various sentiment indexes have garnered momentum, driven by a mix of easing inflationary pressures and rising wealth from stock market gains.
This week’s batch of consumer and wholesale inflation data eased, driven by lower energy costs.
While the situation remains stable for now, the August and September numbers could head upward again as the war in Iran remains at a stalemate.
“Against this backdrop, consumer financial health looks solid,” Bank of America economists said.
“Despite cost-of-living pressures from areas such as gasoline, the share of households paying off their credit card bills in full each month has risen. And there is little sign of an acceleration in households drawing upon their savings.”
Total household debt declined for the first time in six years. But credit card balances rose by $21 billion to $1.26 trillion, a slight decline from last year’s record high of $1.28 trillion.
Disappointing retail sales could strengthen the case for the Federal Reserve to hold steady at next month’s policy meeting.
“Alongside the past week’s softer inflation and labor prints, this will again lower market expectations of a September rate hike, reducing front-end yields,” Mohamed El-Erian, a top economist, said in a note shortly after the data release.
Futures market data indicate that investors are betting on a 60 percent chance that the Fed will not raise interest rates at the Sept. 15–Sept. 16 Federal Open Market Committee meeting.
